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Common Bankruptcy Questions

Chapter 13 Questions

How Does Chapter 13 Bankruptcy Work?

While debtors are allowed to keep all of their property, the court approves a new interest-free plan for repayment. A written plan is created giving details of all the transactions that will occur, and the duration of the same. The repayment must begin within thirty to forty-five days after the case has started. The transitory stage of paying a trustee who then pays a creditor, as in Chapter 7 Bankruptcy is usually eliminated with Chapter 13 Bankruptcy.

Although, in some cases people may involve a trustee who would take care of disbursing money to the creditors as per the plan. Also, as per the law the creditors must strictly adhere the Chapter 13 Bankruptcy Repayment Plan approved by the court and are in fact prohibited to collect any claims from the debtor. Your attorney will prepare new repayment plan to best suit your situation.

The one advantage of Chapter 13 over Chapter 7 Bankruptcy is the full discharge option which is not applicable under Chapter 7 filing. For example, if a debtor manages to complete all necessary payments in the plan, he/she is given a full plan discharge. (There are a few exceptions to this case, which your attorney will guide you about if necessary.) Yet another advantage of the Chapter 13 filing is that a repayment can be created even if creditors disagree with it, as long as it is approved by the Court. Although, in all fairness the court allows creditors also to file an objection, in case they may have any.

How are chapter 13 repayments calculated?

The plan, submitted with their petition to the U.S. Bankruptcy Court, is determined by debtors and their attorneys. It is based on their monthly income, and for higher earning debtors, in terms of a means test that measures the debtor's income against the average income for the state in which they live. "We also have to look at your assets. Once we know what you own, we can figure out which assets may be exempted and which ones are non-exempt," according to the Nashville law firm of Clark & Washington. "The bankruptcy law requires that your unsecured creditors are to receive at least as much as they would get if your non-exempt assets were sold at auction, so we have to keep these figures in mind when drafting your plan."

As a starting point, the monthly net earnings - income after taxes and deductions for health insurance or pensions - are weighed against the individual's living expenses, including rent or mortgage, car payments, utilities, insurance, food and clothing, as well as other reasonable costs of a middle-class household.

Payments on credit cards and other unsecured debts are left out of the calculation because they will be paid at least partially once the repayment plan is in place. The court will also not consider payments on non-essential or luxury items. But interest and late fees that have accrued on delinquent accounts are often waived under Chapter 13 plans.

For three to five years, an individual who has been granted a Chapter 13 bankruptcy will make payments from money that is available after their living expenses have been met. While payments are made, home foreclosures and car repossessions are halted as loan obligations are met through the plan. Car loans are often paid off at a reduced rate and mortgages are back on schedule when the plan is completed.

How much does filing Chapter 13 cost?

The genereal costs and fees for filing Chapter 13 bankruptcy are: $299 fee for filing your chapter 13 bankruptcy. Ask your attorney if you can get this fee waived due to low income levels. You are required to take debt counseling which usually costs around $50 and a finance managing course that costs about the same. Chapter 13 attorney fees may differ, but can usually cost around $1500 and $2000, and sometimes more if the case is difficult.

What are the Steps For Filing Chapter 13 Bankruptcy?

  • Determine whether Chapter 13 is the best solution for you.
  • Prepare a budget.
  • Examine individual cases to figure out whether require filing of Chapter 13 bankruptcy, or can be tackled in some other way.
  • Determine and implement methods of dealing with secured creditors.
  • Devise a chapter 13 plan, and fill out the forms.
  • Pay the filing fee and complete the process of filing the forms and pleadings.
  • Attend whatever meetings you maybe required to attend; with the creditors, court hearings etc.
  • Obtain a discharge once the payments have all been made, and the plan terminated.

There's a lot that lies between the lines, and it goes without saying that our attorneys will take care of these things. All you have to do is fill out that evaluation form that will tell you whether you need to file for bankruptcy in the first place. Thereafter, our Sponsored lawyer on the other side of that phone call will handle, and solve your financial crisis.

What is a Chapter 13 Mortgage Lien Strip?

Homeowners who are facing bankruptcy are often unable to keep up with their mortgage payments and may have taken out a second mortgage as they struggle to stay afloat financially. If foreclosure is looming, they may choose to file Chapter 13 bankruptcy to halt the proceedings, which can be stopped in this type of court action regardless of how far the foreclosure has progressed.

Included in a Chapter 13 petition to the U.S. Bankruptcy Court is a powerful tool that allows consumers to remove the second mortgage. It is particularly helpful at a time when the housing crisis has caused the value of many homes to fall below the amount of their mortgages.

The practice is called lien stripping, which is now legal in every state following a recent Minnesota court decision that allows it in that state. In order for a consumer to qualify for lien stripping, the value of the house must be below the balance of the first mortgage so that the second mortgage is, in effect, not backed by any equity in the house and becomes an unsecured loan. As part of a Chapter 13 action, in which the court orders a repayment plan for the debtor to complete over several years, the second mortgage is stripped from the home and viewed in the same way as unsecured debt, such as credit card and medical bills. Those bills are paid on a pro-rated basis through the court-ordered repayment schedule, so the amount paid on the second mortgage is a fraction of it would have been without taking advantage of the lien stripping option.

Once the Chapter 13 repayment plan is completed, and the debtor has made all the payments ordered by the court, the second mortgage lien is removed permanently from the property. Bankruptcy attorneys at Friedman Iverson, a Minneapolis law firm, advise debtors involved in a Chapter 13 bankruptcy to be sure of the value of their homes before embarking on a lien strip. "You will most likely need to order an appraisal of your house. But the first step is to look at your property tax appraised value," states the law firm's website. "During the housing boom, tax values used to be lower than the true value of the house. But now that housing prices are depressed, property tax appraisals are routinely higher than the appraised value of the house."

Chapter 7 Questions

How Does Chapter 7 Bankruptcy Work?

A trustee is appointed who collects all non-exempt property, sells the assets and distributes proceeds from this sale to appropriate creditors. Chapter 7 is different from other bankruptcy filings because the debtor needs not make a payment to the trustee.

Even though in some cases this would mean that you will lose all your assets, this need not always be the case. It is strongly recommended that if you are apprehensive and feel you will lose your assets, discuss the matter with your Bankruptcy Attorney.

An added advantage with Chapter 7 bankruptcy is that by signing a reaffirmation agreement a debtor can continue to pay for a car loan or a mortgage on their home. This agreement is in place because as per the US Government Bankruptcy Code a debtor could be allowed to retain some or all of his property.

Who Can File For A Chapter 7 Bankruptcy?

The reverse of this question would be more appropriate to answer. Debtors engaged in business would usually not like the prospects of liquidation and Chapter 11 might be a better option for such individuals associated with corporations and partnerships. Also, individuals with regular income if in a debt situation would be better suited to file a Chapter 13 bankruptcy.

Also, any person who has been granted a Chapter 7 discharge (or completed a Chapter 13 plan) within the last 8 years, cannot file for a Chapter 7 bankruptcy plan.

How Likely Are Creditors to Object to Discharge?

Creditors have the right, but not always the intent, to challenge bankrupcty discharge. That does not mean a creditor who is owed money on a particular bill will not show up to a 341 hearing, a court-order meeting of the debtor with a bankruptcy trustee and any creditors who choose to attend.

"A creditor might object to your Chapter 7 case if you ran up a lot of credit card bills in the six months to a year prior to filing. Or, your bankruptcy can be challenged if you misrepresented your financial affairs in a personal financial statement," writes Georgia attorney Jonathan Ginsberg on his website, AtlantaBankruptcyAttorney.com.

Generally, an attorney or a paralegal representing a creditor who attends a 341 meeting will ask if the debtor has assets not listed in their bankruptcy petition. They may also ask to see proof of insurance on a car or home, usually the largest property owned by Chapter 7 filers.

If a creditor does challenge the discharge of a debt, Ginsberg states that the recourse is to negotiate a partial payment plan for that particular debt or to convert the case to a Chapter 13 Bankruptcy, which requires a court-ordered repayment plan over several years.

Instead of representatives of a large credit card company or medical facility, legal experts say those who are most likely to challenge a bankruptcy discharge are individuals who may have lent money to the debtor or a local business creditor.

In some cases, a creditor may take the additional step of filing a lawsuit within the bankruptcy to object to the discharge of a debt. That is called an adversary proceeding, and often is based on a claim of fraudulent behavior by the debtor, such as lying on a credit card application.

New York attorney Craig Robins writes on LongIslandBankruptcyBlog.com that creditors aren't likely to take their complaint this far in a Chapter 7 case because the burden of proof falls on them, they have to pay court and attorney fees to challenge the bankruptcy and there is a considerable amount of legal work involved in such complaints.

In New York, Robins has found, "The court expects the lawyers to do the same amount of legal work whether the case involves a $5,000 consumer credit card debt or a $1,000,000 Chapter 11 [business bankruptcy] turnover action."

How much does it cost to File a Chapter 7 Bankruptcy

Filing fee of $335 - Filing fee may be waived or a payment plan allowed if you can demonstrate to the court that your income is 150% below the poverty level.

Counseling Course $15- $70.

Financial Management Course $15- $70

One of the most expense costs of filing a personal bankruptcy is hiring a bankruptcy lawyer. If you have a simple no-asset case you may be able to do it without the assistance of a bankruptcy attorney, but most filers will need legal assistance.

Bankruptcy lawyers may charge as little as $750 for a simple, Chapter 7, no-asset case. But they will expect full payment before they file the bankruptcy petition. Hiring a lawyer for a chapter 13 bankruptcy will be more expensive but the bankruptcy attorney may allow you to include the payments in your bankruptcy plan.

These costs were pulled in 2011. Costs may have changed slightly since then. If it makes sense for you to file bankruptcy with the assistance of an attorney, please complete our free, no obligation, evaluation form.

What Are Allowable and Reasonable Chapter 7 Expenses?

Unlike Chapter 13 Bankruptcy, which requires a repayment plan over several years, those who file under Chapter 7 must give up any property to pay back creditors that is not covered by court-sanctioned "exemptions." Such exemptions apply to one's home, car, furniture and other possessions the debtor needs to maintain a normal household.

"You need only give up your 'non-exempt' property, which for most people, once the proper exemptions are applied, amounts to nothing. In other words, in many cases much or all of your property will be exempt," according to BKMass.com.

In addition, the court recognizes "allowable and reasonable expenses" that everyone, including debtors, need to live on. As a result, a means test outlined in the bankruptcy regulations will measure how much of their income debtors will be allowed to keep to pay for their living expenses.

Beyond household expenses such as utilities and housing costs, reasonable expenses may include the cost of health and disability insurance, support of dependent children under age 18 and the care of an elderly or ill member of the family.

The two-part means test first applies a formula for exemptions to determine if the debtor can afford to pay back creditors for unsecured debt, such as credit cards or medical expenses. The second part of the test is based on how the debtor's income compares to the average income for the state in which they live.

If a debtor's income is above the average in their state and they are able to pay at least 25 percent of their unsecured debt, they will not qualify for a Chapter 7 Bankruptcy and may be allowed to file under Chapter 13 instead.

Some special considerations covered by the bankruptcy code take into account whether the debtor is an active duty military service member, a low-income military veteran or someone who has a serious medical condition.

Even in cases in which a debtor's income falls below the median level, their ability to fund a Chapter 13 repayment plan is considered. "This common-sense nugget at the heart of the bankruptcy system states that if you can afford to pay none of your debts, you pay none of your debts, but if you can afford to pay some of your debts, you pay some of your debts," states BankruptcyLawInformation.com.

General Questions

Can I File Bankruptcy Without an Attorney?

Bankruptcy filing without an attorney requires considerable document gathering. While there are do-it-yourself kits outlining the documents and procedures needed to file bankruptcy, many experts point out the potential loss that may ensue when an individual undertakes such a serious proceeding.

The obvious benefit of filing bankruptcy without an attorney is the lower cost. According to the U.S. Courts website, a fee of $299 is charged to file a Chapter 7 Bankruptcy, the most common form of personal bankruptcy. The charge to file a Chapter 13 case is $274. Generally, lawyers' fees for personal bankruptcy cases can range from $1,000 to $2,500, in addition to court fees. Chapter 7 is usually easier for an individual to handle without a lawyer's guidance. Chapter 13 requires the debtor to pay back creditors through a court-order repayment plan over several years.

Gathering Bankruptcy Documents on Your Own - In both types of bankruptcy, the debtor must gather a large number of documents, such as credit card statements, mortgage papers, proof of income from all sources, car loan payments, medical bills -- whatever documents outline their financial situation and status of their property and other assets. According to Mortgage101.com, the list of creditors must include each creditor's name, contact information, the account number and the balance that is owed. In addition, the debtor should compile a list of expenses including day-to-day costs of their household, daycare, utilities and other housing costs.

Obtaining bankruptcy documents - Bankruptcy forms and instructions can be obtained online or through the nearest federal court. "The instructions will tell you what can be included in the bankruptcy, what items are exempt, and any additional information that may need to be provided," states the website. "Make sure that paperwork has all signatures and any acknowledgments, if necessary. Upon completion of the forms, you should make two copies of the paperwork for your files."

Debtors who file on their own must also complete a credit management course - usually in two installments which cost about $30 each - as part of the bankruptcy process. They must also attend the 341 meeting before a bankruptcy trustee in court.

How will filing for divorce affect a Chapter 13 bankruptcy?

The answer to the debtor's question depends on a couple of factors. In Chapter 13 bankruptcy, whether you file before the final divorce decree or after the final divorce decree is very important. The debtor does not say whether or not the bankruptcy has already been filed. If it is after the bankruptcy has been filed, an individual or couple has fewer options for implementing the plan, and a divorce decree could affect the ongoing payments of the plan.

The debtor also does not say whether the bankruptcy is being filed individually or jointly. If the bankruptcy has been filed before the divorce decree, a joint filing in a Chapter 13 plan could possibly stand a better chance of surviving the orders of the divorce court. If the filing has occurred by an individual spouse before the divorce decree, the complications presented by the divorce decree could frustrate completing the plan.

It is hard to complete a Chapter 13 Bankruptcy plan even as a married couple. Some 60% of Chapter 13 Bankruptcy cases are dismissed because clients fall behind on their payments. Ideally, the Chapter 13 Bankruptcy plan should be made after a divorce decree so that your discharged debts will not violate a court order of the divorce court.

When you file Chapter 13 bankruptcy after a divorce decree, you have to file as an individual. Only married individuals can file a Chapter 13 jointly. If you filed jointly before the divorce decree was final, you can complete the plan if you and your ex-spouse can agree on how to distribute the payments.

Divorce and Bankruptcy are two separate disciplines of the law, and when they occur simultaneously, each can tend to complicate the process of the other. That is why it is highly recommended you consult with both a bankruptcy and a divorce lawyer or a lawyer who specializes in both disciplines before you file for bankruptcy.

What Debts Are Not Discharged By Filing Bankruptcy?

In a Chapter 7 case, the most common type of personal bankruptcy, the court doesn't allow an individual to keep their assets, but most exemptions allowed under state and federal law are large enough to cover a secured debt such as a house mortgage a car loan. However, if the item's value is greater than the exemption, the debtor may have to sell the property to pay their debt since the court won't discharge it in the bankruptcy.

The U.S. Bankruptcy Court gives the utmost protection to child support or alimony that is owed to a spouse, former spouse, the debtor's children or to a government agency. Court protection is also extended to debts that resulted from a divorce or separation agreement and the ex-spouse doesn't need to file a complaint in order to protect this type of debt from being discharged.

Student loans, whether issued by the government, a non-profit lender or an educational loan fund, cannot be discharged in a bankruptcy unless the debtor can prove additonal payments would create an unusual hardship for them.

If the debtor has made recent purchases of non-essential items or acquired cash advances on a credit card, they shouldn't expect to see those charges included under the bankruptcy. Consumer debts owed for luxury goods or services that cost more than $500 and are incurred within 90 days of filing bankruptcy will not be discharged. For cash advances, the limits are $750 obtained within 70 days of filing.

Property taxes generally are not discharged by bankruptcy, but some federal taxes can be as long as they meet specific conditions. Federal income tax debt may be discharged if it is more than three years old, was filed more than two years before the filing and the debtor didn't file a fraudulent tax return or try to avoid paying taxes.

Any debts or fines owed as a result of delinquent or illegal behavior will also not be cleared away through bankruptcy. These include unpaid fines for personal injury or death caused if the debtor was charged with driving under the influence and traffic tickets, as well as court-ordered criminal restitution or any debts that arose from fraud.

What Federal Income Taxes can be Discharged in Bankruptcy?

In the case of a Chapter 7 Bankruptcy, the most common form of personal bankruptcy, federal income taxes can be discharged only when the taxes due are more than three years old, they were assessed on prior returns at least 240 days before the bankruptcy was filed and the debtor did not file a fraudulent tax return or try to avoid paying taxes.

In addition, tax debt will be considered by the court if the IRS has not already filed a prior tax lien on the debtor's assets. "If they have, the lien survives bankruptcy, which means that the government may still seize property to collect the discharged tax debts," according to the legal website FreeAdvice.com.

In the Florida Bar Journal, attorney Larry Heinkel advises debtors that attempting to have tax debt discharged in a bankruptcy is generally more beneficial than agreeing to an IRS plan called "offer in compromise," which will require payments to be made for an extended period of time.

For bankruptcy cases filed under Chapter 13, which requires that debtors agree to a repayment plan ordered by the court, the IRS must be paid regularly along with other creditors. However, if the debtor does not stay current on taxes assessed after the bankruptcy is approved, the repayment plan could be placed in jeopardy.

Georgia attorney Jonathan Ginsberg contends that in Chapter 7 cases, any federal tax lien that has been filed against property before bankruptcy should attach only to the equity that the debtor has at the time the petition is filed. "Subsequent appreciation or increase in equity does not accrue to the benefit of the taxing authorities," he states on the Ginsberg Law Offices blog.

Ginsberg also warns debtors to be up to date on their tax returns, and to file all tax documents including amendments before the 341 meeting of creditors takes place in front of a bankruptcy trustee. Not doing so could disrupt the bankruptcy process.

"Many bankruptcy trustees will not hold your 341 meeting of creditors hearing if you have missing tax returns from the last four years," he said. "The point here is that bankruptcy trustees want to know if you have non-dischargeable tax liability because it affects the administration of your case."

What Happens When One Spouse Files Bankruptcy Without the Other Spouse?

Married people have a choice of filing separate bankruptcies, or each has the right to file alone without involving their partner. However, if both spouses are responsible for a debt and only one files bankruptcy, the other partner is at risk of being pursued by their creditors for payment. In effect, it will be as if no petition was filed.

There are circumstances in which having one partner file bankruptcy without the other is a good idea. If the couple has been married only a short time and most of the debt relates to one spouse - and was incurred before the marriage - the best move may be for the indebted partner to file alone.

"It's not uncommon for one spouse to have a significant amount of debt in their name only," John Hargrave, a bankruptcy trustee in New Jersey, told Bankrate.com. "However, if spouses have debts they want to discharge that they're both liable for, they should file together. Otherwise, the creditor will simply demand payment for the entire amount from the spouse who didn't file."

The best way for a married couple to determine their course of action is to get a clear picture of whether they can continue to pay their bills.

"The most common sign that you may need a bankruptcy is that you cannot pay your debts as they come due. If you are borrowing on credit cards, using loans to make your monthly payments, or if you are considering a consolidation loan, you may need to consider filing some form of bankruptcy," states Iowa attorney Michael Jankins on the Jankins Law Firm website. "Another common sign is if collection agencies are calling or writing you, or if you are being sued or [have wages] garnished."

Although the most common type of petition filed in U.S. Bankruptcy Court is Chapter 7 Bankruptcy, Jankins recommends that Chapter 13 - which requires a payment plan of the debtors - may be the most effective way for a married couple to save a home that is behind in mortgage payments, a car that is being threatened with repossession or to deal with back taxes owed to the Internal Revenue Service.

Will Filing for Bankruptcy Make My Insurance Rates Go Up?

The main link between insurance rates and filing a petition in U.S. Bankruptcy Court is the individual's credit score, which invariably is driven down once a bankruptcy action is recorded by credit reporting agencies.

A peson's credit rating and the accompanying credit score are a predictor of risk for lenders or others who provide a financial service such as insurance. Normally, those who provide car insurance look at an individual's driving record and how long they have been driving, just as a company that offers home insurance considers the age, size and condition of a home before agreeing to a policy.

When bankruptcy enters the picture, the credit score becomes an important factor as well. "The biggest difference is that insurance risk scores look for stability, but credit risk scores look for a reliable pattern," Craig Watts, a spokesperson for Fair, Isaac and Company (FIC) told Insure.com. FIC provides insurance risk scores that are used by about 300 insurers nationwide.

Different factors are given different weight when being considered by insurers, according to Watts. How much debt a person carries, for instance, counts for 30 percent of the risk score. Payment history counts for 35 percent of the score, while length of credit history is 15 percent, new credit is 10 percent and types of credit held is 10 percent.

"Insurance scores are also more interested in how regularly you pay than in how much you already owe," Watts told the website.

All of these issues come into play when a person has filed bankruptcy, which is likely to result in higher insurance rates when a policy comes up for renewal or when an individual is trying to find a new insurer.

Under these circumstances, individuals looking for affordable coverage should compare rates of different insurers and consider lowering their deductible amounts to offset higher rates on a policy.

According to MyInsurancePlace.com, an individual who goes through a bankruptcy may also have difficulty getting a life insurance policy or may be offered one with less coverage. "This is because you now carry a higher risk of lapsing the policy early," the website states. "It means that insurers are worried you will have to stop paying and cancel the insurance policy in the early years of coverage."